Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘QE3’

Stock Market Forecast for Remainder of 2012

By for Profit Confidential

I’d like to turn the keyboard today over to my colleague Anthony Jasansky, P. Eng. He’s been a 30-plus-year student of the Dow Jones Industrial Average, and I agree with what he says below in his analysis of the where the market is headed between now and the end of 2012.

As Anthony says below, as traders increase or lower their positions over the next four weeks; I see the uneducated popular media blaming the on/off “fiscal cliff” for the market’s gyrations. But the bottom line is clear: each year since 2009, the yearly increase in the Dow Jones Industrial Average has been getting weaker and weaker.

Here’s a chart showing the annual increase in the Dow Jones Industrial Average since 2009:

 QE1, QE2, QE3

Market Insider Bulletin, December 2012

2009: Dow Jones Industrial Average increases 18.8% over 2008

2010: Dow Jones Industrial Average increases 11.0% over 2009

2011: Dow Jones Industrial Average increases 5.5% over 2010

The common denominator in the above chart? In each year since the Great Recession, the Dow Jones Industrial Average has logged a gain of only 50% to 60% of the previous year’s gain.

If today was the last trading day of the year, the Dow Jones Industrial Average would be up 6.6% for the year. In keeping with the three-year trend, the Dow Jones Industrial Average would have to fall about 400 points between now and year-end. I see this move on the downside as being more of a reality than an upside move.

Here are Anthony’s comments as promised:

“The quandary with the Fed’s monetary magic is that it no longer gives the Dow … Read More

Tired of Hearing About Eurozone
Troubles? New Perfect Storm Brews

By for Profit Confidential

Tired of Hearing About EurozoneI know most people are tired about hearing of the economic problems in the eurozone. But my readers need to be aware: a new perfect storm is brewing because of that situation.

The credit crisis in the eurozone has already created enough troubles in the global economy, but it is threatening to trigger more. Here is what Fed Chairman Ben Bernanke said last week, “…the elevated levels of stress in European economies and uncertainty about how the problems there will be resolved are adding to the risks that U.S. financial institutions, businesses, and households must consider when making lending and investment decisions.” (Source: ‘The Economic Recovery and Economic Policy,” Federal Reserve, November 20, 2012.)

Not many in the media picked this up, but it was very important. Bernanke, regardless of what you think of his policies, is the head of the most important central bank in the world…and a very intelligent man. He knows exactly what he and the Fed are doing. It’s unprecedented to have the head of the Fed warning Americans about a crisis in countries so far away.

It doesn’t take a rocket scientist to figure out now that growth in the global economy has stalled because of the eurozone crisis. (I started writing in January of this year that the eurozone would fall back into recession in 2012 and that it would caused economic problems for the U.S.) The eurozone credit crisis is far from over—one country after another in that area is falling into a recession and this in turn is causing the global economy to deteriorate further.

The region is now experiencing an … Read More

Correction Among Stock Market Leaders Creates Good Opportunity

By for Profit Confidential

Correction Among Stock Market Leaders Creates Good OpportunityThe stock market has more downside over the near term, but it’s likely to hit a floor as soon as price-to-earnings (P/E) multiples are no longer excessive. In many ways, the current pullback is the selloff we didn’t get after the third round of quantitative easing (QE3) was announced. This is a market that’s fragile, and investors are worried about new austerity measures in the near future.

As the main stock market indices pull back, there are a number of market leaders that are now more attractively priced, and they are worth keeping an eye on. Alexion Pharmaceuticals, Inc. (NASDAQ/ALXN) is one of the market leaders among biotechnology stocks, while The TJX Companies, Inc. (NYSE/TJX) is one of the market leaders among retailers.

The TJX Companies operates many brand-name stores that you might be familiar with, including T.J Maxx, Marshalls, HomeGoods, Winners, and HomeSense. This company has been hugely successful both in its operations and on the stock market over the last couple of years, and it’s because economic times have been tough. Selling clothing and home goods at an attractive price point, The TJX Companies has been able to grow its business when other retailers, like J.C. Penney Company, Inc. (NYSE/JCP), have struggled. You can see the contrast in the companies’ stock charts featured below.

tjx stock market chart

Chart courtesy of www.StockCharts.com

stock market chart

Chart courtesy of www.StockCharts.com

The TJX Companies is one of a number of market leaders in this stock market, and it’s up about ten-fold since the beginning of 2000. The stock has been appreciating very consistently and has proven to reaccelerate after all its major price corrections. This is why … Read More

One of the Best Areas for Profit in this Trader’s Stock Market

By for Profit Confidential

Best Areas for Profit in this Trader’s Stock MarketOver the last 12 months, there has been some serious wealth creation from the stock market. Now things are pulling back, because global economic reality has finally usurped the artificial enthusiasm regarding the third round of quantitative easing (QE3). (See “Warning: QE3 Rally Is Now Over.”) As we know, not all industry groups have experienced the same levels of business conditions this year. But as a stock market sector, some of the strongest wealth creation over the last 12 months has come from biotechnology stocks. The NASDAQ Composite Index, representing a lot of pure play technology stocks did well this year, but the NASDAQ Biotechnology Index did far better.

As you know, I’m not an advocate of equity investors taking up new positions in this stock market. I think the current stock market pullback has more legs, and rightly so—things aren’t so great in the world and the stock market is worried about the upcoming fiscal cliff.

I like a number of dividend-paying blue chips, but I’d hold off initiating new positions. But for risk-capital, speculative investors, one of the best areas of the stock market remains biotechnology stocks, and what I think speculators should be doing now is identifying the strongest names within the sector in anticipation of an attractive entry point for traders.

In doing so, all you need to do is pick and choose among the biotechnology stocks that compose the NASDAQ Biotechnology Index. All the best up-and-coming companies are there, and no matter what happens to the rest of the stock market or the global economy, there’s big money to be made from … Read More

Don’t Look at This Chart if You Are Bullish on Stocks, the Economy

By for Profit Confidential

Bullish on StocksThe corporate earnings growth of companies in the Dow Jones Industrial Average is falling at a staggering rate—something I started warning about during the second quarter of this year. Sadly, the trend of declining corporate earnings growth will only continue.

All the pieces are falling into place now. In these pages, I have been rigorously warning about rising key stock market indices; in the third quarter of 2012, the Dow Jones Industrial Average rose 11.4% on the news of QE3 and hopes that corporate earnings growth would hold. But that optimism was crushed when companies like International Business Machine Corporation (NYSE/IBM), Caterpillar Inc. (NYSE/CAT), and United Technologies Corporation (NYSE/UTX) announced their third-quarter 2012 earnings projections for the fourth quarter of 2012 and 2013.

It would be nice if those were the only companies that fell short on their earnings, but unfortunately many more companies are failing to meet their corporate earnings targets.

Other Dow Jones Industrial Average firms had negative news to share. 3M Company (NYSE/MMM) reported a fall in third-quarter revenue and slashed its target for full-year corporate earnings. Exxon Mobil Corporation (NYSE/XOM), the world’s largest oil company and a component of the Dow Jones Industrial Average, reported quarterly corporate earnings that were seven percent lower than the same quarter last year ago. The reason? Exxon says production has been declining and becoming a challenge for the company. (Source: Reuters November 1, 2012.)

Another Dow Jones Industrial Average company, Pfizer Inc. (NYSE/PFE), reported a decline of 14% in third-quarter corporate earnings. The company’s total revenue fell 16%, with U.S. sales falling by 18% and international sales dropping by seven … Read More

The More Years Pass, the More it Seems the U.S. Is Following Japan’s Economic Path

By for Profit Confidential

U.S. Is Following Japan’s Economic PathSince the financial crisis of 2008, the U.S. economy has yet to find the path to economic growth. Economists like me believe we are in for a deep and dark period for the U.S. economy.

As we all know, the Federal Reserve announced a third round of quantitative easing (QE3) on September 13, 2012. I continue to wonder how many more bouts of quantitative easing we will see in the name of economic growth in the U.S. economy. QE4? QE5? More?

A famous quote attributed to Albert Einstein says: “Insanity is doing the same thing over and over again and expecting different results.” The Fed’s quantitative easing programs (a fancy name for increasing the money supply, printing more money), in my opinion, certainly fit the definition of insanity.

We should learn from the past. We can learn something from the Japanese economy and what happened there over the past couple of decades.

It is becoming more apparent that the U.S. economy is following in the footsteps of the Japanese economy.

Supposedly, the Fed’s spree of quantitative easing should have brought economic growth and prosperity to the U.S. economy. The well-intentioned goal was to get rid of the bad assets that the U.S. banks were holding so these banks could start lending once again—and thus, economic growth could get on its way.

In the years immediately following its economic burst, the central bank of Japan was slow to get its quantitative easing going. But once it decided to go the money-printing route, Japan’s central bank flooded the monetary system with its paper currency and kept the interest rate artificially near zero … Read More

Why the Election Will Dictate Which Way America Goes

By for Profit Confidential

Why the Election Will Dictate Which Way America GoesOn the eve of the presidential election, the world and America are anxiously waiting to see whether President Obama or Governor Mitt Romney will become the 45th U.S. President.

The outcome of Tuesday night will be critical not only for the direction of the country on both the political and economic front, but also on the direction of foreign policy.

The latest national poll by CNN has the race to the White House at a dead heat, with Obama at 48% and Romney at 47%. In the key Ohio race, support for Obama has fallen from 52% on October 2 to the current 50%, but that two percent could be enough to win back the White House.

At this point, I don’t really care who wins, but something will need to be done about job creation, the $16.2 trillion in U.S. debt, and the pending “fiscal cliff.”

Whether you are a Democrat or a Republican, you know that we need job creation. The October non-farm job creation report showed 171,000 new jobs, which was better than expected; but there is a long way to go, as the job creation reading is too low to drive the unemployment rate down. The unemployment rate is well below the four-percent level in 2006 and 2007.

Obama and Romney have different strategies for lowering the unemployment rate and driving job creation. While Obama wants to extend the Bush-era tax cuts to those making under $250,000 a year, which represents the majority of working Americans, Romney wants the cuts to apply to all income earners. While I’m not here to take a side, the … Read More

Where to Get the Best Earnings in This Stock Market

By for Profit Confidential

Best Earnings in This Stock MarketIf there is one international business in which you could still say, “business is booming,” it would be Visa Inc. (NYSE/V). The company just reported its fiscal fourth-quarter and year-end financial results and the numbers were great. This company has been a powerhouse wealth-creator on the stock market and so far has been immune to the economic woes facing the largest economies.

The company’s revenues grew to $2.7 billion in its latest quarter, up from $2.4 billion. But after a tax reversal, earnings accelerated significantly to $1.7 billion, way up from $880 million in the same quarter last year.

Visa has been a top performer on the stock market over the last year. Currently trading around $140.00 a share, it was $90.00 a share this time last year. The stock is expensively priced, but then again, it has always been expensively priced. Visa is a large-cap, blue chip company with a lot of staying power. The company’s stock chart is featured below.

Visa Inc Chart

Chart courtesy of www.StockCharts.com

While a company like Visa is doing well due to grow in emerging markets, it’s more of an exception in this market. Companies like McDonalds Corporation (NYSE/MCD) and 3M Company (NYSE/MMM) have struggled to grow their earnings due to weakness in Europe, Japan, and China. McDonalds’ comparable sales in Europe actually grew 1.8% in the most recent quarter, but guest traffic fell. The company’s third-quarter earnings fell three percent to $1.5 billion on flat revenues. McDonalds’ stock chart is below.

McDonalds Corp Chart

Chart courtesy of www.StockCharts.com

So if there is one clear trend this latest earnings season, it’s that weakness abroad is definitely taking a toll … Read More

Hurricane Sandy Halts Trading—But Not the Decline in Revenue Growth

By for Profit Confidential

Hurricane Sandy Halts Trading But Not the Decline in Revenue GrowthIn September, consumer spending grew 0.8%, after an unrevised rate of 0.5% in August, and the figure beat consensus. With Hurricane Sandy closing the stock market today, I still think the near-term trend is lower. The S&P 500 Index is right at its 100-day moving average (MA) and is likely to break it. Most blue chips have been deteriorating since the beginning of the month. The stock market is not expensively priced by any means, but revenue growth is deteriorating.

Investor sentiment is also deteriorating as investors continue to be risk-averse, buying bonds instead of stocks. Even with modestly positive gross domestic product (GDP) numbers from the U.S. and U.K. and signs of economic stability in China, investor sentiment is going downward, because the appetite for risk is dwindling. Oil at $88.00 a barrel says it all. Hurricane Sandy will no doubt keep oil prices down this week.

Price deterioration among blue chips has been significant this month. Benchmark stocks like PepsiCo, Inc. (NYSE/PEP), McDonalds Corporation (NYSE/MCD), and 3M Company (NYSE/MMM) have taken big price hits. 3M’s stock chart is below:

mmm stock market chart

Chart courtesy of www.StockCharts.com

You could call the recent price deterioration among blue chips the consolidation that we didn’t get when expectations for a third round of quantitative easing (QE3) became a reality. (See “Warning—Apple’s Share Price a Major Red Flag.”) Regardless, the reality of declining revenue growth is substantial, and it’s difficult to imagine the stock market appreciating with business conditions so tight.

Many blue chips remain very fairly priced in this market, and because of this, I can’t see the stock market crashing without some … Read More

QE3 and the Rich: What Stocks Will Benefit?

By for Profit Confidential

QE3 and the Rich What Stocks Will BenefitThe initial support for the third round of quantitative easing (QE3) has faded as the focus shifts to earnings, the economy, the pending fiscal cliff, and the presidential election. I think there’s a sense that QE3 is not the savior to the stagnant gross domestic product (GDP) growth in America, but is only a gamble. The reality is that the flow of easy money will largely reward the top one to five percent of income earners and, in turn, will benefit the high-end merchants in the retail sector.

A recent study from A.T. Kearney reports, “The richest consumers have a higher percentage of discretionary spending, and dominate not only such categories as hotel stays and financial services, but also hospital and outpatient services, as well as newspapers and magazines.” (Source: “A.T. Kearney Study of Global Wealth and Spending Projects $12 Trillion in New Consumer Spending over the Next Decade,” A.T. Kearney web site, last accessed October 24, 2012.)

Let’s not beat around the bush. The reality is that QE3 will help people who carry significant debt to lower financing costs for another three years. The low interest rates mean cheaper cash will be available for the rich to make more money and finance spending, whether that’s on investments, housing, or other high-cost ventures. This means the rich, with their larger pool of capital, can continue to increase their net wealth faster than the average American.

A viable investment strategy to play the effect of QE3 is to determine which companies in the retail sector will be the benefactors of the policy. (Read about my favorite Internet stocks in “… Read More

S&P 500 up Against a Wall Following Slight Breakdown

By for Profit Confidential

Wall Following Slight BreakdownThe S&P 500 is up against a bit of a wall and has to convincingly break 1,465 again, which it achieved in mid-September, in order to accelerate. A lot of corporate earnings have been decent, but quite a few are reporting light visibility for the fourth quarter, and this is no surprise. The stock market peaked mid-September when the mini-rally, driven by a third round of quantitative easing (QE3), consolidated; it has now recovered. We’ve seen large, international companies report earnings or visibility below consensus due to very slow business conditions in the eurozone. Despite the S&P 500’s fair valuation, I think it’s going to be quite difficult for the main stock market averages to accelerate much further.

While Johnson & Johnson’s (NYSE/JNJ) earnings were good and the company’s share price helped the Dow Jones Industrials, earnings results for International Business Machines Corporation (NYSE/IBM) had the opposite effect. This former stock market leader broke down significantly, as you can see in the stock chart for International Business Machines (IBM) below:

 International Business Machines Chart

Chart courtesy of www.StockCharts.com

Expectations were already lowered for third-quarter earnings season. My reading of current corporate results is that blue chip companies are now running out of cost-cutting options to keep their earnings afloat. The likelihood of corporations being able to accelerate their earnings going into 2013 is very low, considering business conditions in the eurozone and declining economic growth in China, which is now the world’s second-largest economy.

The “AGA” stocks, which include Apple Inc. (NASDAQ/AAPL), Google Inc. (NASDAQ/GOOG), and Amazon.com, Inc. (NASDAQ/AMZN), have all retreated from their recent 52-week highs. Amazon.com recently hit $264.00 a share; now … Read More

Where’s the Good News? Companies Just Meeting Expectations

By for Profit Confidential

Companies Just Meeting ExpectationsThe S&P 500 Index really needs to break the 1,475 level in order to achieve a meaningful breakout from its current consolidation, which has lasted just over a month. Frankly, I’ll be surprised if it can do so; this stock market looks tired and spent. As a generality, I wouldn’t be buying stocks in the large-cap space at this time; I’d hold out for the next correction. But the stock market today is right where it should be—it’s not too hot or too cold; therefore, it’s unclear as to how things will end up this year.

Corporate earnings are mostly coming in as expected, and so is visibility. You can bet that companies will be conservative with their year-end forecasts; corporate earnings are managed and that’s a fact of life in the stock market. What we haven’t had so far are any major home runs, and it’s no surprise. It’s pretty difficult for corporate earnings to really accelerate in an environment with very little economic growth.

Corporate earnings from Johnson & Johnson (NYSE/JNJ) were good, and the stock provided a boost to the Dow Jones Industrials. I think PepsiCo, Inc. (NYSE/PEP) is representative of the state of corporate earnings and the stock market. The company recently beat consensus for the third quarter, but maintained its full-year outlook to be on the safe side. PepsiCo’s stock chart appears below:

Pepsico Inc Chart

Chart courtesy of www.StockCharts.com

Corporate earnings from the financials have come in mostly as expected, and the group moved slightly higher. But corporate earnings from benchmark technology stocks have been disappointing so far, with International Business Machines Corporation (NYSE/IBM) and Intel Corporation … Read More

This Is the Correction We Didn’t Get After QE3 Became Real

By for Profit Confidential

Correction We Didn’t  Get After QE3 Became RealThe more I look at this stock market, the more blue chips I see declining in price, many of which are blue chips that previously hit new record highs. The perfect example of this is Starbucks Corporation (NASDAQ/SBUX), which is feeling the effects of austerity and slowing international growth. Starbucks recovered strongly from the stock market’s financial crisis low in March 2009, rising almost six-fold. In April of this year, Starbucks hit an all-time record high on the stock market of $62.00 a share, but has since declined to the $42.00 per share level. It’s another example of a previous stock market leader breaking down before the mini-rally, driven by a third round of quantitative easing (QE3), and not participating with it this past summer. A stock chart of Starbucks is below:

 Starbucks Corp Chart

Chart courtesy of www.StockCharts.com

All these price breakdowns among blue chips before the QE3-driven, low-volume rally signaled a shaky performance by the stock market this summer. All these blue chips may accelerate again if the earnings growth and visibility come through for the third quarter, but frankly, this isn’t very likely. Intel Corporation (NASDAQ/INTC) peaked in May of this year at $29.27 a share; now it’s getting close to $21.00 a share, with lowered Wall Street estimates across the board. Intel’s stock chart is below:

 Intel Corp Chart

Chart courtesy of www.StockCharts.com

The saving grace for the current state of the stock market is its valuation, and among blue chips, most are fairly priced given their earnings. Where we go from here depends on visibility for the fourth quarter. We know that the Federal Reserve will keep flooding the … Read More

Why QE3 Hasn’t Delivered the Same Stock Rally We Got After QE1, QE2

By for Profit Confidential

Business Man ShrugAs the stock market rally continues and the risks keep piling up, the bear market rally that began in 2009 is losing momentum.

Looking at the chart below of the S&P 500, it paints an even prettier picture than the Mona Lisa.

Some well-known stock advisors are saying the stock market rally will continue and are telling their clients to buy. The problem is that they may be only looking at index and stock charts alone and ignoring the underlying issues of the market.

Even though the uptrend on the S&P 500 continues, the fundamentals are screaming that such will not be the case for too long.

spx s-p 500 large cap index

Chart courtesy of www.StockCharts.com

We have seen the stock market rally months after the Federal Reserve’s announcement of the first and second rounds of quantitative easing, QE1 and QE2. Shouldn’t it be the same with the third round, QE3? Maybe not this time. You see, the announcement of QE3 was widely expected and discounted by the stock market. The unknown “news,” and what gave stocks a lift, was the open-ended nature of QE3; the Fed didn’t give us an end date for QE3.

Hence, the market was already anticipating more quantitative easing—already knew the Federal Reserve would print more money. Now, with the fundamental economic data being released so weak, what will propel stocks higher? QE4? Forget it; while QE4 will be needed, it’s far off in the distance.

A key indicator called the “Volatility Index” (VIX)—also called the “fear index” for the S&P 500—is showing some interesting developments.

The S&P 500 and VIX have an inverse relationship. When the S&P 500 goes … Read More

The Potential Market-altering Events in the Fourth Quarter

By for Profit Confidential

Potential Market-altering EventsWe are entering the always intriguing fourth quarter, during which I expect to see some major surprises that could alter the current investment and political climates and increase the stock market risk.

The Dow Jones Industrial Average and the S&P 500 have recorded four straight months of gains, yet the stock market risk remains high, given the strong advance this year. Blue chips and large-cap stocks showed decent buying in September with technology trailing. For the year, the NASDAQ continues to be tops with a 19.6% advance, followed by the S&P 500 at 14.5%. The Dow is trailing at just under 10.0%.

The key event with the most stock market risk at this point is the uncertainty of the presidential election on November 6, when President Obama will try to extend his policies into a second term. But on January 1, 2013, the country will face the potential “fiscal cliff,” when the terms of the Budget Control Act of 2011 are scheduled to go into effect, resulting in automatic spending cuts across the board and tax increases. The problem is that cutting fiscal spending at a time when economic renewal is still fragile is risky; it could hamper the impact the Federal Reserve’s third round of quantitative easing (QE3) might have on the U.S. economy and could add to the stock market risk.

Federal Reserve Chairman Ben Bernanke reiterated his support for QE3 and said that the easy money will be available even as the economy recovers. The fear is the easy money could drive up inflation, and in reality, it is more of a vehicle for the wealthy…. Read More

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